The Irish Dairy Board (IDB) has annualised sales in the region of €2 billon. Headquartered in Dublin, the business employs 3,300 people globally and has successfully established routes to market for Irish dairy produce into Asia, Europe, the Middle East, North America, Africa and China.

A co-operative enterprise, IDB is owned by Irish dairy processing co-operatives and dairy companies and, through them, by Irish dairy farmers. On behalf of its members, IDB is engaged in the purchase, marketing, and sale of consumer dairy products and dairy food ingredients worldwide through its subsidiaries and extensive network of agents and distributors. Consumer dairy products are marketed primarily under the Kerrygold, Pilgrims Choice, MU and Beo brands, and the consumer division activities are supported by cheese packing facilities in the UK and butter packing in Germany. The Dairy Trading and Ingredients division sells and trades products across the globe and its facilities include powder blending and packing in the UK and ingredient cheese processing in the UK and US.

With subsidiaries around the world and an international growth strategy, one of the primary responsibilities for treasury in the Dublin-based treasury headquarters of the Irish Dairy Board (IDB) is cash management, using cash pooling and cash concentration accounts. It also arranges financing for the group, provides funding via the pooling system, and carries out all FX hedging. Fundamentally it is, says Michael McGovern, IDB’s Group Treasurer, a “traditional group treasury function”.

McGovern is in his 35^th year with IDB and one of the biggest changes he notes over this time concerns the volume of currency deals and the spread of the business to more overseas locations. “We used to do an awful lot more foreign exchange (FX) dealing,” he explains. Until January 2002, the Irish punt was the base currency which was hedged against the US dollar and sterling, as well as Dutch guilders, German marks, French francs and so on. With the introduction of the euro (naturally IDB’s base currency), the amount of hedging required drastically reduced and now the only currencies hedged are US dollar and sterling, with most sales outside Europe being transacted in dollars.

However, new offices will be opening soon in Russia and in Saudi Arabia and with others in the pipeline this will bring new FX requirements and cash management challenges. The expansion of IDB’s markets has seen an increasing need for more sophisticated technologies to facilitate the necessary degree of treasury oversight, but the raised level of automation has enabled the operation to level out at its current complement of four full-time professionals.

Finding funding

The EU’s milk market is currently regulated by a quota system in which every member state has a national production quota (split amongst its farmers). Exceeding the national quota triggers a penalty called a ‘super levy’, which is paid to the EU. The EU decided in 2009 that by 2015 the quotas will expire and milk production will effectively be liberalised. IDB, which is expecting a production increase in Ireland of some 50% by 2020, has developed a growth strategy which will open up new routes to the markets and for that, having the right financing structure in place, says McGovern, is “absolutely critical”.

IDB is well-positioned to withstand economic pressure. Ireland may have been facing serious issues over the past few years, but as an exporter with a broad reach (all of its product goes abroad one of its biggest markets being Germany) it has been fairly well insulated against domestic trouble. And not only is Ireland an attractive tax-regime (the corporate tax rate is 12.5% and hence the reason many overseas treasury functions have re-located here), IDB’s basic product line is a food staple and therefore unlikely to be cut from the typical consumer’s shopping list.

“The crisis has impacted us more on our financing structures than on our actual business,” notes McGovern. Although the banks – particularly the international players – are very keen on IDB’s business, because it is based on a staple food and it is all exported, it has been necessary to put in more committed facilities. “Banks are much more comfortable with asset-backed structures,” he concedes. The global financial crisis caused some of these institutions to withdraw from the relationship, despite 30 or more years of continued business. McGovern is philosophical, accepting that the international banks that took this decision were facing their own problems at a head-office level and indeed some are now back in the fold. The continued support from its banks is something McGovern is very aware of and is something that informs current bank selection policy: “we strive to give an equal share of wallet to those banks that are now in our structure.”

Fair play

It comes as little surprise that McGovern’s team is “very conscious” of monitoring these relationships and that the emphasis is on fairness. “You need to give them the ancillary business to warrant them lending to you, but I think all treasurers are looking at the same thing; they’re lending to us and supporting us, so quid pro quo, we do our utmost to support them.”

In terms of its own funding requirements, instead of going to the bond markets, IDB, based on its current funding requirement, will continue to rely on its banks to provide debt (it currently has a €160m revolving credit facility with its panel of banks). “We did a private placement in the 1990s when we bought our US subsidiaries,” says McGovern. “Obviously we keep in touch with the private placement market and if we require long-term funding we would consider its value to us as an add-on source of funding.”

IDB members, which number ten of the largest Irish dairy processing companies, do get good support from the banks, but they also have access to credit through IDB as well. This currently comes in the form of invoice discounting, a scheme that has recently been established with IDB’s panel of banks to open up “good, solid credit” and an easier (and cheaper) source of working capital for the Irish dairy industry.

The scheme is based on a finance deal involving a three-year reverse invoicing discount facility of €190m. This is an innovative facility in that it is a syndicated and termed arrangement, with Rabobank leading and HSBC, Barclays, RBS, Bank of America Merrill Lynch (BofA Merrill) and AIB also on-board (the same panel of banks that offer “some good healthy competition” to meet IDB’s FX needs). Although €190m is not a large sum as syndicated deals go, there is extra capacity for IDB to increase it should it be needed, with a possible extension being sought later this year.

Need for more sophisticated technologies to facilitate the necessary degree of treasury oversight.

“We’ve designed a web portal for our members,” says McGovern explaining the delivery model. The portal, a development by IDB’s own IT team, places the emphasis on ease of operation, with no extra software required by the supplier; all that is required is a secure login. In practice, having delivered the product and invoice to IDB, the supplier can then link to the participating banks via the portal, indicating which invoices it wishes to sell. IDB verifies that these invoices are bona fide, and the supplier can immediately receive funds from the bank, with real-time updates delivered to the supplier at each stage. IDB will then settle the relevant invoices, paying the bank directly according to the original credit terms. The supplier pays the market rate for the advance funds, but that rate is based on the superior credit-worthiness of IDB. In essence, the creditor stays the same, explains McGovern, but the beneficiary of the creditor becomes the bank, and so it is not bank debt on IDB’s book. The simplicity of the system means it is now “working like a dream”.

Using IT

Technology has an increasingly important part to play in modern business and McGovern believes one of the crucial roles in treasury today is to look after IT, assuring the treasury perspective is always heard when changes are implemented. “With the way it is going, a lot of the treasury processes are IT-driven. If you don’t have someone with treasury experience and IT knowledge I think you will be lost,” he comments.

Given its currency requirements, IDB is a committed user of the 360T and FXall trading platforms and it also has Misys’ Confirmation Matching Service in place. “There’s a lot happening on the processing side and we automate as much as we can,” explains McGovern. One of his main tools is IT2’s treasury management system (TMS), “a very decent system”. Since the acquisition of that vendor by Wall Street Systems in January this year McGovern has noted no impact, adding that it is still perhaps too early to feel either benefit or drawback.

The systems and goals of the IDB treasury function are “very much in line” with those in regular commercial structures.

One of IT2’s major developments in the past year has been the migration of all of its desktop functionality into the mobile environment for those that want it. Is the prospect of taking treasury decisions on-the-go a cause for celebration for IDB? “Not really,” says McGovern. “For looking at positions, it may be useful. But as for processing anything through it, I’d be a little bit worried about that.”

Getting connected

One service that has made its mark is SWIFT messaging. IDB has embarked on a “big project” to get itself connected. Having worked with one cash management provider (BofA Merrill) it is now splitting the function three ways: BofA Merrill will retain North American operations; RBS will undertake European operational accounts; and HSBC will provide an overlay multicurrency pooling system. “Because of that, we’re going to access all our banks via SWIFT’s Alliance Lite 2 structure,” says McGovern. “This allows us to be bank-agnostic and gives us greater flexibility to reach out to different banks as we increase our footprint.”

IDB currently operates a notional pooling system in Europe and cash concentration in the US. Following the deployment of SWIFT connectivity this will change to a zero-balance pooling system with the multi-currency cash pool residing with HSBC. McGovern accepts that the shift to three cash management banks will lose some of the single-bank efficiencies. He sees it as part of a trend internationally amongst treasurers to move away from the single provider, but the main driver is to give IDB more flex and allows it to “share the wallet” with its banks.

Without a flow of deposits right now that would warrant the use of money market funds (MMFs), any cash excess is deposited by IDB amongst its syndicate of banks. The policy is one of going for “safety and not yield”. In this respect, although he often has banks knocking on the door to pitch for business, McGovern states “we’ll always keep the door open”. Sometimes it is best just to say no. “Some years ago I had a visit from BCCI which was offering huge yields,” recalls McGovern. “We didn’t trade with them, but they gave us a clock as a memento of their visit. A few months later they went spectacularly bust. Anytime anyone comes in talking about great yields, I always take a glance at the BCCI clock.” The bank’s failure in 1991 cost depositors more than $10 billion, according to The Economist.

A co-operative treasury

The systems and goals of the IDB treasury function are “very much in line” with those in regular commercial structures. “We strive to be a world-class treasury and it’s always our goal to be up there with the best,” states McGovern. “We’re not as big as some but the processes are no different from other treasury departments.”

In this respect then, regulatory impositions can be just as much a nuisance to IDB’s treasury as they can be to any other. “Know Your Customer (KYC) regulations make me mad,” McGovern complains. Whilst the fundamental idea is sound, in practice, from his perspective (and probably that of most other treasurers), it fails to assess where the risk is. “For example, I’ve lost count of the number of times we’ve had to deliver passports of the same people into the same banks – how does their passport expiry change someone’s identity?” They should, he says, “be risk-profiling not box-ticking”.

But fraud is an ongoing concern for most treasurers and McGovern is no different. Although IDB no longer uses cheques, he observes that cheque fraud is still a problem, especially in the UK. “The US has the Positive Pay system to combat it; when a company writes a number of cheques it sends a file with all the details to its bank and the bank will only clear when the details match. In the UK that doesn’t exist and yet cheque fraud is huge. I can’t understand why that system is not used.”

Electronic fraud around payments is much more of a direct threat. IDB has witnessed it first-hand, fortunately with no loss, and retains a number of measures to thwart such attempts. However, McGovern believes more could be done to help curtail the efforts of these “very innovative” criminals, not least by the banks and the authorities.

The Single Euro Payments Area (SEPA) is something that is much talked about by banks and treasurers alike, and IDB has been ready for some while with all its IBANs, BICs and other system requirements in place. “We’re ready for SEPA, so what’s keeping SEPA?” McGovern asks. When it does finally fall into place he feels SEPA will benefit IDB, not least in being able to execute more centralised payments.

In fact, the whole cash management reorganisation of IDB will bring more centralisation to treasury processing and this, along with getting the financing structure in place, particularly with the EU quota changes coming, will consume much of McGovern’s time over the coming months and years. But then with the co-operative to keep happy, and moves into new markets and countries already being planned, he is never likely to let the grass grow under his feet.